Lawmakers (mostly Democrats) have argued for years that compensation taxed as carried interest is unfair since it is essentially the same as ordinary income. The position has held sway in the House, where members voted several times to end the tax break. But senators have consistently resisted the idea.
To win them over, lobbyists say that tax writers might not seek to close the loophole, but scale it back instead. One option could be to tax carried interest at a level between the current capital gains rate and ordinary income tax rates.
Lobbyists also expect no taxpayer receiving carried interest will be exempt from whatever is decided.
If tax writers can strike the perfect balance on limiting carried interest, they could have sufficient support in the Senate to use the measure as an offset on extenders legislation.